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If you are running a startup, it may be in your interest to use an options pool. An options pool helps you retain the best talent within your employees and incentivise your workforce to be productive. Managing your employees and keeping them motivated is highly important in developing a strong culture. This culture will help to define your business in the long run. This article will outline what an options pool is and some of the pros and cons of using one.
What is an Option?
An option is the right to exercise a choice in the future. This is different to shares. A share is usually vested in the person (or company) straight away.
When someone is granted an option for shares, it means that at some determined point in the future, that person can exercise their right to buy those shares.
What is an Options Pool?
An options pool is where you reserve a portion of the shares in your company. You will keep this portion aside to issue to certain people as an option. Typically, this is made for the benefit of the employees of a firm. However, you can also give options to long-term non-employees such as consultants and advisors.
In addition, if a person has an option rather than shares, they will not have the rights that come with shares. For example, they will not vote at shareholder meetings nor have a right to any dividends that you issue.
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Are There Any Downsides?
Although an options pool is an excellent way of incentivising your employees to stay at your firm and increase its share price, it also comes with some downsides.
Another consideration is that the overall shares in your company will become diluted if you create a new option pool. As a result, some investors will ask you to decide the size of the options pool by reference to the company’s valuation before they invest. By structuring it in this way, these shares will be less likely to affect investors’ shares.
What Does an Options Pool Involve?
In summary, using an options pool requires setting aside some of your company’s equity for your employees. On the one hand, this will incentivise them to work hard and stay at your company. However, it will also dilute your shares in the company on the whole.
Further, because you do not want to lose investors’ confidence, you should take the stock options from the founders’ shares. Finally, you should ensure you have a highly organised cap table to give confidence to potential new shareholders. A cap table sets out your company stock, equities, and options that can be converted into shares.
Key Takeaways
Your startup can use an options pool to keep its best employees and incentivise them to work hard and add value to your business. This can also give confidence to potential new shareholders, as it demonstrates that you are conscious of keeping a dedicated and productive workforce.
If you are going to set up an options pool, you should also know that it will dilute your overall shares in the company. Finally, consider that sophisticated shareholders will likely want an options pool size to be assessed by the company’s valuation before their investment.
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Frequently Asked Questions
An options pool is a determined amount of shares that have been set aside, which can be issued when an option has been exercised.
A shareholder usually has certain rights that come with shares, such as a right to dividends and a right to vote at shareholder meetings.
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